L&T extends on strong Q2; analysts say fairly valued

Moneycontrol Bureau

Shares of engineering and construction major Larsen & Toubro were up close to 2 per cent at Rs 1696, after the company's second quarter numbers, announced yesterday, were better than market expectations. The stock has gained nearly 70 per cent so far this calendar, compared to a 39% rise in the BSE Capital Goods index, and way ahead of most rival companies' stocks.

L&T is sticking to its order book guidance of around Rs 80-84,000 crore for the current year, around 15-20% higher than last year.

The stock has risen steadily over the last couple of months, even as many leading brokerages cut their ratings, saying the company would struggle to meet its full year order book guidance because of the economic slowdown. And while the company's second quarter numbers have beaten analyst estimates, most brokerages feel that the stock is fairly priced at these levels, and offer little upside.

Here is a snapshot of their view on L&T post second quarter earnings:

HSBC (Neutral, Target: Rs 1761)

New orders during H1 FY13 were up 26 per cent y-o-y and look set to achieve our estimate of Rs 78,700 crore (management guidance of Rs 80-84000 crore). While past trend of bumper orders during Q4 is an upside risk, (still we are 8.2-7.1per centabove consensus on FY14/15 EPS), our visibility is constrained by the government's poor performance in reigniting infrastructure spend across key sectors such as power, bulk material handling and hydrocarbon. Hence despite our critical stance we maintain our above consensus order inflow outlook of 12 per cent y-o-y. Any meaningful upward revision in new orders would be a catalyst for the stock.

Goldman Sachs (Neutral, Target: Rs 1690)

Continued strength on order inflows with close to 26 per cent y-o-y growth in the 1H shows dominance of L&T in the E&C market in India. We increase our FY13(estimated) order inflow growth to 18 per cent from 10 per cent earlier, and consequently raise our FY13/14/15E EPS by 1%/5%/5%. The stock is trading at 12-month forward PE multiple on our revised earnings, 1 standard deviation above historical median valuation, which caps further upside from here, in our view. 

CLSA (Underperform)

L&T's management reiterated its FY13 orderflow (15--20 per cent growth), revenue (15-20 per cent growth) and margin (+-50 basis points) guidance. This implies 9% orderflow and revenue growth, and a 60-basis point margin drop in 2H (October--March) to meet the lower-end. We raise our FY13-15 EPS by 2-3% to factor in higher E&C revenues, lower fixed costs. With the stock up 70% year-till-date, good news appears priced in; implied standalone PE multiple of 16 times FY14 looks rich in context of 10% EPS compounded annual growth.

Kotak Securities (reduce, Target: Rs 1625)

lmost full valuations preclude meaningful outperformance; post recent run. Standalone L&T trades at 15 times 1-year forward P/E, adjusted for dividends and subsidiary valuation of Rs 450; reasonable in context of likely 13-15 per cent earnings growth trajectory in the medium term. Similar valuation results for L&T excluding infrastructure subsidiaries (FY2013E and FY2014E EPS of Rs 91 and Rs 101) adjusted for Rs 200 as value of all infra+other investments (e.g. in Seawoods, L&T realty and FZE, etc.) with about 18-19% adjusted RoE and likely 15% earnings growth.